Paradox of 100% income tax in India
The way our income tax slabs are designed (particularly the tax waivers and tax surcharges), leads us to pay 100% tax on some part of our income. In order to illustrate this more clearly, below is a plot of the income tax payable as a function of total income. This is calculated based on the latest tax slabs as per 2025 budget, for the income range of 0 to 55 lacs. This does not consider standard deduction. It doesn't look too bad, with tax rising as income is rising, as we may expect. Next, I plotted the percentage tax on incremental income paid for each additional 1000 rupees of income. And this looks as follows. Note the two intervals where tax percentage spikes to 100%. To be clear, the first interval corresponds to income range 12 to 12.73 lacs, and the second interval corresponds to income range 50 to 51.71 lacs. In both cases, it is a significant amount to be paying a 100% tax on. In progressive tax system, you would expect the tax rate to increase as the income increases, ...